AF1605 Introduction to Economics

2022-23 First Semester

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Lecture Group: 1001 (Thursday) / 1002 (Monday)

Test Venue:

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Instructions:

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Refer to the instruction on Lecture Blackboard for the right version for you.
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Multiple Choice Questions (20 questions, 20 marks)

Choose ONE answer for each question. Write your answer in the space provided.

Question 1
Last year, you have purchased 1000 shares of a Company A’s stock at $120 per share. Now,
it can be sold at $100 per share. It is expected one year later, it is worth $95 per share. If the
stock of Company B is expected to decrease in price by 10% in the same period, what should
be the right thing to do for a rational investor? (Assume there is no uncertainty about future
stock price. Assume also that there are no transaction fees for buying and selling stocks.)
(Note: switching to Stock B means selling the shares of Company A and buy the stock of
Company B.)
A. Hold Stock A because the current price is below the purchase price.
B. Sell Stock A because the current price is below the purchase price.
C. Hold Stock A because it is worth more money than switching to Stock B.
D. Switch to Stock B because it is worth more money than holding Stock A.

Answer: ___

Question 2
Suppose, at your home, you still have a few sets of Covid-19 antigen test kits, which was
purchased at $100 per set in January 2022. Recently, a set of kit of the same brand has fallen
in price from $20 to $10. The opportunity cost of using an old set of test kit of this brand has
recently:
A. Risen.
B. Fallen.
C. Been unchanged.
D. Not information to judge.

Answer: ___

Question 3
You plan to go to a dinner with your friend tonight. Which of the following will not affect the
opportunity cost of attending this dinner?
A. The dinner is less expensive.
B. Your part-time job for video-editing, which is originally your best alternative use of
tonight, is now cancelled.
C. One of your best friends will come to the dinner, which makes it more enjoyable to
you.
D. You have a higher risk of getting an infectious disease, which is prevalent at the time.

Answer: ___

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Question 4
Every day, Peter is willing to pay at most $26 for the first cup of coffee from the café, $18 for
the second cup, $10 for the third cup, and $0 for the fourth cup or more. The café charges $16
per cup if you are not a member, but charges $9 per cup if you are a member. What is the
maximum amount of membership fee you are willing to pay per day to become a member?
(Note: the two schemes coexist in this case.)
A. $0
B. $12
C. $15
D. $27

Answer: ___

Question 5
Good A and Good B are substitutes in consumption, while Good A and Good C are
substitutes in production. Good B and C are unrelated. Now a per-unit tax (on sellers) is
imposed on Good B and Good C. How do the taxes affect the equilibrium price and quantity
for Good A?
A. Equilibrium price increases. Equilibrium quantity increases.
B. Equilibrium price decreases. Equilibrium quantity decreases.
C. Equilibrium price increases. Equilibrium quantity changes in an uncertain direction.
D. Equilibrium price changes in an uncertain direction. Equilibrium quantity increases.

Answer: ___

Question 6
If the equilibrium price is $12, which of the following is true?
A. A price ceiling at $10 will lead to a lower quantity transacted.
B. A price floor at $15 will lead to a higher quantity transacted.
C. A price ceiling at $15 will lead to an excess supply.
D. A price floor at $10 will lead to an excess supply.

Answer: ___

Question 7
Which of the following is NOT true about a quota imposed on a good?
A. It is effective when the amount of quota is smaller than the free-market equilibrium
quantity.
B. It will increase the market equilibrium price.
C. The demand for its substitutes in consumption will fall after imposing a quota.
D. The consumer surplus for this good decreases after imposing a quota.

Answer: ___

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Question 8
Which of the following change will increase consumer surplus for sure?
A. Increase in supply.
B. Decrease in supply.
C. Increase in effective price floor.
D. Increase in effective price ceiling.

Answer: ___

Question 9
If around the current equilibrium point, own price elasticity of demand is higher for Good A
than for Good B, which of the following individually CANNOT explain the difference?
A. Good A is a luxury, but Good B is a necessity.
B. Good A is coke and Good B is all soft drinks.
C. Good A represents the same good one week after the price change. Good B represents
the same good three months after the price change.
D. Good A takes a larger percentage of total expenditure, while Good B takes a smaller
percentage of total expenditure.

Answer: ___

Question 10
Alice consumes both tea and noodles. Her demand for tea is inelastic while her demand for
noodles is elastic. The cross-price elasticity of demand between tea and noodles is zero. If
there is a 5% decrease in price tea and a 5% increase in price for noodles along the same
demand curve, which of the following is correct?
A. Alice’s expenditure on both tea and noodles will increase.
B. Alice’s expenditure on both tea and noodles will decrease.
C. Alice’s expenditure on tea will increase, but her expenditure on noodles will decrease.
D. Alice’s expenditure on tea will decrease, but her expenditure on noodles will increase.

Answer: ___

Question 11
If cross price elasticity of demand is positive, the two goods are:
A. Normal goods
B. Inferior goods
C. Substitutes in consumption
D. Complements in consumption

Answer: ____

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Question 12
Which of the following is NOT generally true about a per-unit tax of t per unit?
A. The price actually paid by buyers increases, but by less than t.
B. The price eventually received by sellers decreases, but by less than t.
C. The quantity transacted is unchanged.
D. The proportional share of tax burden to consumers is lower if the price demand
elasticity is higher.

Answer: ___

Question 13
If at Q = 8, TC = 64. If at Q = 9, TC = 75. Which of the following is a general relationship
that can be confirmed with the data given?
A. If MC < AC, MC is increasing.
B. If MC > AC, MC is decreasing.
C. If MC < AC, AC is decreasing.
D. If MC > AC, AC is increasing.

Answer: ___

Question 14
If at Q = 5, AVC = 20. If at Q = 6, AVC = 20.2. What is MC at Q = 6?
A. 20
B. 20.1
C. 20.2
D. 21.2
Answer: ___

Question 15
Which of the following statement is NOT correct?
A. Law of diminishing returns implies the marginal product eventually decreases when
we use more and more of the variable factor with quantity of the fixed factor constant.
B. Law of diminishing returns implies the marginal cost eventually increases when we
use more and more of the variable factor with the quantity of the fixed factor constant.
C. Economies of scale apply when the long-run average cost is increasing when output
increases.
D. Economies of scale apply when the long-run marginal cost is below the long-run
average cost at the quantity considered.

Answer: ___

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Question 16
There are three machines that we can choose to print t-shirt to sell. If we print 2500 t-shirts a
day, the average cost of production using the basic model is $10, while the average cost for
standard model and powerful model are $9 and $7 respectively. Which machine we should
choose?
A. Basic model
B. Standard model
C. Powerful model
D. All equally good.

Answer: ___

Question 17
Given the following AVC and MC at different quantities for a firm in a competitive industry,
what is the quantity supplied if the price is $90?
AVC($/ MC($/
Q (unit) unit) unit)
1 150 150
2 120 90
3 110 90
4 100 70
5 100 100
6 110 160
7 120 180
8 135 240
A. 0
B. 3
C. 5
D. Cannot be determined.

Answer: ___

Question 18
Which of the following does not give rise to deadweight loss?
A. Imposition of effective price ceiling
B. Imposition of effective price floor
C. Increase in supply
D. Imposition of per-unit tax

Answer: ____

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Question 19
Which of the following is NOT true about profit maximization for a perfectly competitive
firm in the short run?
A. MR(q) < P because it is a price taker.
B. MR(q) = MC(q) at profit-maximizing output level.
C. It will temporarily shut down in the short run if the price is below the minimum point
of AVC.
D. It is possible for a firm to earn positive profit in the short run.

Answer: ___

Question 20
Which of the following is not true about the long-run equilibrium for a perfectly competitive
market? (Assume that all firms are identical, and the cost of each firm does not change with
the size of the industry.)
A. Free entry and exit of firms results in zero economic profit for each firm.
B. The long-run equilibrium price is at the minimum point of the long-run AC curve.
C. An increase in demand does not change the number of firms.
D. An increase in demand does not change the long-run equilibrium price when the cost
curves are unchanged.

Answer: ___

Part II: Short Questions (20 marks in total)

Question 1 (3 marks)
Your good friend asks you to go with her to a concert tonight, but you have already scheduled
to give a tuition lesson to a secondary school student and you cannot reschedule the lesson to
another time. To go to the concert, you will have to cancel the lesson, from which you could
earn $250. To go with your friend to the concert, you will have to pay $350 for the ticket and
spend $150 eating dinner with her at a nice restaurant. You will take some bus rides that will
cost you $25 altogether. If you go to the tuition lesson as usual, you will spend only $55 on
your dinner and you spend $10 on MTR rides to go to and from the students’ home. What is
the minimum benefit in monetary terms (i.e. in dollar) you have to get from the concert and
dinner gathering with your friend that will make you choose to go with your friend? Show
your steps briefly.
Answer:

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Question 2 (4 marks)
Susan is a chef but decides to quit her job and operate her own restaurant. Consider the
following information for the coming year if Susan goes ahead to operate the restaurant.
• To operate this restaurant, Susan has to quit her current full-time job earning
$300,000 a year and work full time in her restaurant.
• She has to spend $240,000 to purchase furniture, appliances and equipment, and their
market values will decrease by 25% in the first year of operation.
• Accounting depreciation for these capital goods allocated to the coming year is
$50,000.
• She has to pay $250,000 on wages for employees working in her restaurant in a year.
• She has to spend $200,000 on food and supplies, utilities, and other relevant costs in a
year.
• To finance the initial investment and operating costs, Susan has to use her saving of
$400,000, from which she could earn an interest of 2 percent in the coming year.
• She also has to borrow $400,000 at 4 percent from a bank in the coming year.
• The total after-tax revenue of her restaurant in the coming year is $900,000.
(a) Calculate the accounting profit. (1 mark)
Answer:

(b) Calculate the economic profit. (2 mark)

(c) Should she operate the restaurant business or not? Explain. (1 mark)
Answer:

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Question 3 (5 marks)
The Rapid Antigen Test (RAT) kits for COVID-19 became commonly used in 2022 in Hong
Kong. In April 2022, the government started to require all primary and secondary school
teachers and students to have an RAT before they go to school. At the same time, production
cost is reduced with technological improvement. Apply the four-step approach introduced in
class, explain briefly how these will affect the price and quantity of the RAT kits in the
market in April 2022.
Step 1:

Step 2:

Step 3: (Diagram, Not required here.)

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Question 4 (8 marks)
In City X, the demand for Good R is given by Qd =160−3 P , and the supply of Good X is
given by Qs =5 P , where P is in terms of dollar($) and Q is in terms of million unit.
(a) The equilibrium price = $______.
The equilibrium quantity = ______ million units. (2 marks)
Now, there is a per-unit tax of $4 imposed by the government to the sellers of Good R.
(b) The new supply equation under tax is: ______________________. (1 mark)
(c) The price paid by buyers under tax is $ _______.
The price received by sellers after paying the tax is $ _______.
The equilibrium quantity under tax is _______ million units. (3 marks)
(d) The total tax revenue is $ _______ million. (1 mark)
(e) Assuming the tax is not due to externality, the deadweight loss is $ ________million.
(1 mark)
We only grade the final answers for this question. Intermediate steps can be written here for
calculation, but they will not be graded.

END OF PAPER

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